Fixed Income Insights
Key Highlights:
- The US labour market is exhibiting atypical dynamics, with stagnant cyclical job growth, weakening payrolls and a fragile equilibrium that raises the risk of unemployment spikes. These vulnerabilities could trigger a repricing of rate expectations and periods of heightened market volatility
- Generative AI investment is driving a wave of significant capital expenditure, benefiting semiconductors, real estate and power infrastructure, but also raising questions about over-expectations and financial risks
- These shifts highlight the need for a more nuanced investment approach that balances short-term volatility with long-term structural opportunities
US labour market: cooling or cracking?
The US labour market sits in a “curious equilibrium” of low hiring and separation rates, soft employment growth, and steady unemployment, leaving it vulnerable to even modest demand shocks. Declining immigration and demographic shifts have reshaped labour supply, reducing breakeven payroll estimates. At the same time, wage growth has cooled, disproportionately affecting younger and lower-income workers. Accelerating adoption of AI is reshaping entry-level roles and contributing to rising graduate unemployment. Together, these trends could increase the risk of repricing rate expectations and renewed market volatility.
AI’s impact on credit markets
The generative AI investment cycle is unfolding in three phases: infrastructure build-out, enterprise deployment, and monetisation. Hyperscalers are driving significant capital expenditure, which is projected to reach roughly USD400 billion in 2025, benefiting sectors like semiconductors, real estate, and power infrastructure. Despite strong credit fundamentals among hyperscalers, the rapid pace of AI investment raises questions about sustainability and potential over-expectations. Suppliers and firms reliant on hyperscaler spending face greater vulnerability should capital expenditure normalise or slow.